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Doug Noland’s Credit Bubble Bulletin: Turned Tight

This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.

U.S. Non-Farm Payrolls increased 559,000 in May, about double April’s 278,000 gain, but still below the 675,000 consensus forecast. Average Hourly Earnings rose a stronger-than-expected 0.5% for the month, with back-to-back strong monthly earnings gains (April up 0.7%). The Unemployment Rate declined to 5.8% from April’s 6.1%, the lowest level since April 2020. It’s worth noting monthly Unemployment averaged 5.9% over the past 30 years (6.2% over 40 yrs and 6.3% over 50 yrs).


Now The Balance Begins To Shift

The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.

This report tells why, and what to look for in the data and the markets.  GO TO THE POST


June 4 – Bloomberg (Christopher Condon): “Federal Reserve policy makers should be ‘deliberately patient’ and wait to see more evidence that the U.S. labor market has made more progress before they consider cutting down their asset-purchase program, Cleveland Fed President Loretta Mester said. ‘We want to be very deliberately patient here because, you know, this was a huge, huge shock to the economy,’ Mester said… Mester spoke just after a Labor Department report showed U.S. job growth picked up in May… ‘I view it as a solid employment report,’ she said. ‘But I’d like to see further progress.’ Mester noted that the prime-age labor-force participation rate has yet to return to pre-pandemic levels. She said she was not overly concerned about inflation because she didn’t see wage increases feeding into higher overall prices.”

The FOMC is clearly in no rush to begin the process of pulling back on massive monetary stimulus. I guess May’s somewhat weaker-than-expected jobs gain provides justification for pushing out the talk about talking about tapering – at least that’s the way the bond market traded Friday. Ten-year Treasury yields dropped seven bps in post-jobs data trading, with yields ending down four bps for the week. The U.S. dollar index dropped 0.4% Friday, reversing most of the gain from earlier in the week – and throwing some cold water on the sickly greenback’s recovery attempt.

Lost in the shuffle was ADP’s stronger-than-expected 978,200 jobs added in May (estimates 650k), the strongest showing since June 2020. ADP reported a booming 850,000 Service-Provider jobs added. Curiously, ADP reported 65,000 new construction jobs, in contrast to Friday’s Department of Labor data posting a 20,000 decline. ADP had 128,000 Goods Producing jobs added, versus the Labor Department’s 3,000. Moreover, ADP reported pervasive strong employment gains at small, medium and large companies.

Examining weekly jobless claims data, applications for unemployment benefits dropped to 385,000, the lowest level since March 2020. Weekly Initial Jobless Claims averaged 940,000 over the past year.

June 2 – Business Insider (Grace Dean): “The US labor shortage, which is hitting industries from education and healthcare to hospitality and ride-hailing apps, is holding back the nation’s economic recovery from the pandemic, the US Chamber of Commerce said… In some states and some industries, there are fewer available workers than there are vacancies, a new report by the Chamber said. ‘The worker shortage is real – and it’s getting worse by the day,’ Suzanne Clark, the president and CEO of the Chamber, said… ‘The worker shortage is a national economic emergency, and it poses an imminent threat to our fragile recovery and America’s great resurgence,’ she said.”

June 1 – The Hill (Joseph Choi): “The worker shortage crisis in the U.S. has continued to worsen in the past months according to… the U.S. Chamber of Commerce. The Chamber stated in its reports that in March there were a record 8.1 million vacant jobs in the U.S., showing an increase of 600,000 positions from February. However, the number of available workers per job, 1.4 workers per job, has become half of what the national average has been for the past 20 years… The business group notes that in some industries, there are fewer available workers than the number of vacant jobs, such as education, health services and government jobs. ‘More than 90% of state and local chambers of commerce say worker shortages are holding back their economies, and more than 90% of industry association economists say employers in their sectors are struggling to find qualified workers for open jobs,’ the Chamber wrote…”

Chamber of Commerce data and comments corroborate myriad anecdotes of an increasingly unbalanced and overheated economy suffering from bottlenecks, supply chain issues and shortages (including labor).

June 1 – Reuters (Lucia Mutikani): “U.S. manufacturing activity picked up in May as pent-up demand amid a reopening economy boosted orders, but unfinished work piled up because of shortages of raw materials and labor. The Institute for Supply Management (ISM) survey on Tuesday found companies and their suppliers ‘continue to struggle to meet increasing levels of demand,’ noting that ‘record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments’ of manufacturing. According to the ISM, worker absenteeism and short-term shutdowns because of shortages of parts and workers continued to limit manufacturing’s growth potential.”

According to the ISM survey, Average Delivery Times jumped to a record 85 days. At 78.8, the Supplier Delivery Index rose to the highest level since 1974. The Backlog Index advanced to a record high 70.6, while Factory Orders rose to 67 (“just below a more than 17-year high”). Separately, the IHS Market Manufacturing PMI index rose to 62.1%, with New Orders up almost four points to 65.6, both at record highs in survey data back to 2007.

Meanwhile, the ISM Services Index gained to 64 (up from 62.7) in May, the highest reading in survey data that goes back to 1997. Services Prices Paid surged almost four points to 80.6, second only to the September 2005 price spike. Growth was notably broad-based, with all 18 industry components registering growth in May. Meanwhile, both the IHS Markit Services PMI Index and Prices component rose to survey record highs.

The ISM Manufacturing and Services Surveys each posted declines in Employment components. The Services Employment Index declined more than three points to 55.3. Bloomberg quoted Anthony Nieves, chair of the ISM’s Services Business Survey Committee: “Even if all the businesses right now tried to reopen everything tomorrow, they couldn’t do it because they have capacity issues. They don’t have the labor. They don’t have the production capabilities.”

June 3 – Reuters (Evan Sully): “Nearly half of U.S. small business owners reported unfilled job openings in May, marking the fourth consecutive month of record-high readings as finding qualified applicants remains a lingering challenge… The National Federation of Independent Business (NFIB) said in its monthly jobs report that 48% of small business owners reported unfilled job openings in May on a seasonally adjusted basis, up from 44% in April. May’s reading is 26 points higher than the 48-year average of 22%. Furthermore, the report showed that 93% of owners looking to hire reported few or no ‘qualified’ applications for the positions they were trying to fill last month.”

If the ISMs, PMIs, NFIB and the Chamber of Commerce aren’t convincing, Fed officials need to look no further than their most recent “Beige Book” (released Wednesday) for evidence of tight labor markets. “Labor demand strengthened, but hiring was held back by widespread labor shortages.” “Manufacturers reported that widespread shortages of materials and labor along with delivery delays made it difficult to get products to customers. Similar challenges persisted in construction. Homebuilders often noted that strong demand, buoyed by low mortgage interest rates, outpaced their capacity to build, leading some to limit sales.”

“Staffing levels increased at a relatively steady pace, with two-thirds of Districts reporting modest employment growth over the reporting period… It remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople. The lack of job candidates prevented some firms from increasing output…”

And by region: Boston “Labor demand strengthened, but hiring was held back by labor shortages.” New York: “Hiring picked up and wages continued to grow moderately, with availability of workers cited as a top concern.” Cleveland: “Hiring activity was reportedly modest because of a dearth of job applicants. A greater share of firms boosted wages, especially for hourly workers.” Dallas: “Reports of labor shortages were more widespread across sectors and skill levels than the last report.” Atlanta: “Labor markets improved and wage pressures picked up for some positions.” San Francisco: “Economic activity in the District expanded significantly, and labor market conditions continued to improve modestly. Wages and inflation picked up further.” Chicago: “Employment, consumer spending, business spending, and manufacturing production all increased moderately…”

Prior to Friday’s jobs data, there appeared to be some momentum building for beginning to talk about talking about tapering. Philadelphia Fed President Patrick Harker on Wednesday commented, “We’re planning to keep the federal-funds rate low for long, but it may be time to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases.” He added it’s “not something we are going to do suddenly, though.” “I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time.”

Dallas Fed President Robert Kaplan this week reiterated his view that he’d prefer to “talk taper sooner rather than later.” “I think it would be wiser sooner rather than later to begin discussions about adjusting our purchases with a view to taking the foot off the accelerator gently, gradually, so we can avoid having to depress the brake down the road… At this stage, as it’s clear we are weathering the pandemic and making progress, I don’t think the housing market needs the level of support that the Fed is currently providing, and I would love to see sooner rather than later a discussion of the efficacy, for example, of those mortgage purchases.” Kaplan also shared his view that labor markets are tighter than some of the data may suggest.

It’s not as if Harker and Kaplan are espousing hawkish views. “Slowly, carefully…” and “gently, gradually” certainly do not imply a forceful tightening of monetary policy. Indeed, the plan is to withdraw stimulus cautiously, to ensure markets don’t tighten financial conditions. But with major imbalances and mounting inflationary pressures, it seems rather obvious the Fed should be preparing markets for a pullback from the most extreme crisis-era monetary stimulus imaginable.

The old, “what are they afraid of?” comes to mind. Fed officials can continue to use millions of unemployed workers as justification and rationalization for crazy inflationist policies. Yet the Fed’s prevailing worries center around asset Bubbles and the likelihood of a destabilizing “taper tantrum” when it eventually moves to rein in stimulus measures. Market expectations have the Fed beginning the taper discussion over the coming months, but not actually commencing balance sheet reduction until early next year. This would likely push the initial little baby-step rate increase out to 2023. It is frightening to contemplate the depth of structural damage that could be inflicted from prolonging “Terminal Phase” excess for a couple additional years.

AMC Entertainment gained 95% in a wild Wednesday trading session (up 83% for the week), pushing year-to-date gains to 2,160%. The Goldman Sachs Most Short Index surged 7.6% Wednesday, capping an eight-session run of 17.8%. Koss was up 77% on Tuesday and Wednesday, before an abrupt selloff cut the week’s gain to about 17%. Blackberry as much as doubled in two sessions, ending the week up 38%. GameStop rose a third before closing Friday with a 12% weekly advance. PetMed Express jumped 58% during Wednesday’s session and ended the week up 13%. Bed Bath and Beyond rose 62% Wednesday, but the week’s gains were cut to about 13% by Friday. Express gained 36% Wednesday (up 15% for the week); Naked Brands 29% (up 13%); Workhorse 20% (up 36%); and GTT Communications 57% (up 110%) – as so-called “meme stocks” sprang back to life with a vengeance.

It’s worth noting the “average stock” Value Line Arithmetic Index traded Friday to an all-time high, with a year-to-date gain of 22.7%. The Philadelphia Oil Services Index ended the week with 2021 gains of 57.4%; the KBW Bank Index 36.9%; the Nasdaq Bank Index 35.7%; the Dow Transports 23.7%; the S&P600 Small Cap Index 23.4%; the NYSE Financial Index 23.4%; the Bloomberg REIT Index 19.8%; and the S&P400 Midcaps 18.3%. The Goldman Sachs Most Short Index has gained 41%. Not bad for a little more than five months.

June 3 – Bloomberg (Katherine Doherty): “AMC Entertainment Holdings Inc.’s debt is also getting a blockbuster boost from retail stock trading mania. AMC’s 12% second-lien bonds rose above their face value of 100 cents on the dollar Thursday, a stunning comeback from their low of just 5 cents on the dollar last November. The company’s debt rallied this week as credit investors cheered the latest rounds of equity financing… Proceeds from the 11.6 million of new shares AMC sold Thursday — worth $587 million — are earmarked for general corporate purposes, a catch-all term that can include activities like paying down debt or funding acquisitions.”

It’s clearly not only equities securities benefiting from the loosest financial conditions imaginable. Junk bond Credit default swap (CDS) prices dropped four bps this week to a 2021 low 283 bps – and are now only about eight bps above January 2020’s decade low 275 bps. At $270 billion, U.S. junk bond issuance in five months has already surpassed 2020’s record first-half issuance. Investment-grade CDS declined marginally this week to near-2020 lows.

June 3 – Bloomberg (Caleb Mutua, Paula Seligson and Craig Torres): “The Federal Reserve’s plan to begin unwinding its unprecedented backstop of corporate debt is rekindling an idea that many have warned about: that investors are now convinced that the central bank will bail them out again if needed. From Neuberger Berman to Invesco Ltd., investors say that the Fed’s intervention at the depths of the Covid-19 pandemic provides a model to follow for future crises, which isn’t necessarily what the central bank wanted to communicate. Chairman Jerome Powell has said the Fed would only act as a backstop in once-in-a-generation type emergencies. Yet risk premiums barely moved after the central bank said it’s going to gradually shed those investments, and companies are still selling bonds after a relentless rally over the past 14 months that’s driven borrowing costs to all-time lows and debt issuance to record highs.”

While the Fed stated its intention to unwind its corporate bond portfolio was unrelated to monetary policy, I have to wonder if they had hoped this move might throw a bit of cold water on speculative excess. A couple of cogent Bloomberg headlines: Thursday: “As Fed Exits Credit, Investors See ‘Helicopter Parent’ Close By.” And Friday afternoon: “Fed to Keep ‘Invisible Presence’ in Bond Market, Citigroup Says.”

The Fed in March 2020 opened Pandora’s box – and no one believes the Fed’s corporate bond market backstop will be relegated to “once-in-a-generation emergencies”. I am reminded of when the GSEs aggressively intervened in the MBS marketplace for the first time in 1994 (expanding balance sheets by a then unprecedented $150bn). This backstop momentously altered market risk perceptions and debt securities prices, incentivizing leveraged speculation and Bubble excess.

The GSE backstop returned in crisis year 1998 to the tune of $305 billion – and then these quasi-central banks expanded balance sheets another $317 billion in 1999, $242 billion in 2000, $345 billion in 2001, $242 billion in 2002, and $246 billion in 2003. Huge – history altering – numbers, but rather small potatoes compared to what will play out with the inflation of the Fed’s balance sheet.

June 4 – Bloomberg (Alex Wittenberg): “The Federal Reserve will keep its ‘invisible presence’ in the corporate-bond market even after unwinding a program that sent borrowing costs for companies plummeting while spurring a rally in credit, according to Citigroup… The Fed couldn’t credibly exit the debt market because ‘it cannot tolerate the catastrophic consequences of bond origination and secondary trading snapping shut,’ Citigroup strategists led by Daniel Sorid wrote… As long as corporate bonds remain important to the financial system, the Fed’s program will ‘continue to exert power over the market,’ according to Citigroup.”

Snake down the path of activist/interventionist central banking and inflationism, and there will be no turning back. That’s especially the case in this age of unfettered “money” and Credit, speculative excess and myriad asset Bubbles. It’s kind of crazy the Fed is using the unemployed to justify $120 billion market liquidity injections. To our central bankers’ great surprise, much of our nation’s labor market has Turned Tight. And it’s not at this point easy to pinpoint the benefits of prolonging egregious monetary inflation. Meanwhile, myriad risks – certainly including unleashing an inflationary spiral and stoking perilous asset Bubbles – are increasingly obvious.

 

For the Week:

The S&P500 added 0.6% (up 12.6% y-t-d), and the Dow increased 0.7% (up 13.6%). The Utilities were little changed (up 3.1%). The Banks added 0.3% (up 36.9%), and the Broker/Dealers gained 1.2% (up 26.5%). The Transports dropped 1.8% (up 23.7%). The S&P 400 Midcaps were unchanged (up 18.3%), while the small cap Russell 2000 gained 0.8% (up 15.8%). The Nasdaq100 advanced 0.6% (up 6.8%). The Semiconductors rose 0.9% (up 15.0%). The Biotechs slipped 0.3% (down 3.2%). With bullion down $12, the HUI gold index fell 1.8% (up 4.5%).

Three-month Treasury bill rates ended the week at negative 0.0125%. Two-year government yields added less than a basis point to 0.15% (up 3bps y-t-d). Five-year T-note yields declined two bps to 0.78% (up 42bps). Ten-year Treasury yields fell four bps to 1.56% (up 64bps). Long bond yields dropped five bps to 2.23% (up 59bps). Benchmark Fannie Mae MBS yields added a basis point to 1.83% (up 49bps).

Greek 10-year yields slipped a basis point to 0.81% (up 19bps y-t-d). Ten-year Portuguese yields declined two bps to 0.45% (up 42bps). Italian 10-year yields fell four bps to 0.87% (up 33bps). Spain’s 10-year yields dipped two bps to 0.45% (up 41bps). German bund yields declined three bps to negative 0.21% (up 36bps). French yields fell two bps to 0.15% (up 49bps). The French to German 10-year bond spread widened one to 36 bps. U.K. 10-year gilt yields slipped a basis point to 0.79% (up 59bps). U.K.’s FTSE equities index increased 0.7% (up 9.4% y-t-d).

Japan’s Nikkei Equities Index declined 0.7% (up 5.5% y-t-d). Japanese 10-year “JGB” yields were about unchanged at 0.08% (up 7bps y-t-d). France’s CAC40 added 0.5% (up 17.4%). The German DAX equities index jumped 1.1% (up 14.4%). Spain’s IBEX 35 equities index fell 1.5% (up 12.6%). Italy’s FTSE MIB index gained 1.6% (up 15.0%). EM equities were mostly higher. Brazil’s Bovespa index surged 3.6% (up 9.3%), and Mexico’s Bolsa gained 1.0% (up 14.6%). South Korea’s Kospi index advanced 1.6% (up 12.8%). India’s Sensex equities index rose 1.3% (up 9.1%). China’s Shanghai Exchange slipped 0.2% (up 3.4%). Turkey’s Borsa Istanbul National 100 index increased 0.8% (down 3.0%). Russia’s MICEX equities index jumped 2.1% (up 15.8%).

Investment-grade bond funds saw inflows of $1.717 billion, while junk bond funds posted outflows of $385 million (from Lipper).

Federal Reserve Credit last week dipped $9.3bn to $7.880 TN. Over the past 90 weeks, Fed Credit expanded $4.153 TN, or 111%. Fed Credit inflated $5.069 Trillion, or 180%, over the past 447 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $0.9bn to $3.536 TN. “Custody holdings” were up $146bn, or 4.3%, y-o-y.

Total money market fund assets added $3bn to $4.612 TN. Total money funds declined $139bn y-o-y, or 2.9%.

Total Commercial Paper declined $3.5bn to $1.186 TN. CP was up $148bn, or 14.3%, year-over-year.

Freddie Mac 30-year fixed mortgage rates rose five bps to 2.99% (down 19bps y-o-y). Fifteen-year rates were unchanged at 2.27% (down 35bps). Five-year hybrid ARM rates gained five bps to 2.64% (down 46bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 3.12% (down 41bps).

Currency Watch:

June 2 – Wall Street Journal (Mike Bird): “The People’s Bank of China is getting restive about the strength of the Chinese yuan. That is something to keep an eye on: Any attempt to prevent it from rallying further would provide fresh fuel for a clash between Beijing and Washington over currency manipulation. At around 6.38 to the U.S. dollar, the yuan is at its strongest level since 2018… It has rallied by almost 12% in the past year already. The PBOC said… it would raise foreign-exchange reserve requirements for banks after a former central-bank official suggested to state media over the weekend that the currency’s recent strength wasn’t sustainable or desirable.”

June 1 – Reuters (Tom Westbrook and Winni Zhou): “A mountain of dollars on deposit in China has grown so large that banks are struggling to loan the currency and traders say it poses a risk to official efforts to control a fast-rising yuan. Boosted by surging export receipts and investment flows, the value of foreign cash deposits in China’s banks leapt above $1 trillion for the first time in April… A previous jump, late in 2017, preceded heavy dollar selling which turbocharged a steep yuan rally in early 2018. Market participants say the size of the even bigger hoard this time raises that risk, and leaves policymakers’ efforts to restrain the yuan vulnerable to the whims of the exporters and foreign investors who own the cash. ‘This positioning in particular, in our view, is susceptible to a capitulation if the broad dollar downtrend were to continue,’ said UBS’ Asia currency strategist Rohit Arora…”

May 30 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank lifted its official yuan midpoint to a new three-year high against the dollar on Monday, with its trade-weighted basket index touching the loftiest level since 2016. The People’s Bank of China (PBOC) set the midpoint rate at 6.3682 per dollar… or 0.28% firmer than the previous fix of 6.3858 on Friday. It was the strongest guidance rate since May 17, 2018.”

June 3 – Reuters (Jonathan Cable): “Russia… said it would ditch all U.S. dollar assets in its National Wealth Fund (NWF) and increase holdings in euros, Chinese yuan and gold in what analysts said was a political move ahead of a presidential Russia-U.S. summit later this month… ‘Like the central bank, we have decided to reduce investments of the NWF in dollar assets,’ Finance Minister Anton Siluanov said…”

For the week, the U.S. Dollar Index was up slightly to 90.136 (up 0.2% y-t-d). For the week on the upside, the Brazilian real increased 3.5%, the South African rand 2.5%, the Norwegian krone 0.7%, the Swedish krona 0.4%, the Australian dollar 0.4%, the Japanese yen 0.3% and the Swiss franc 0.1%. On the downside, the New Zealand dollar declined 0.5%, the British pound 0.2%, the euro 0.2%, the Singapore dollar 0.1%, the Mexican peso 0.1%, the South Korean won 0.1%, and the Canadian dollar 0.1%. The Chinese renminbi declined 0.42% versus the dollar this week (up 2.06% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 2.0% (up 21.3% y-t-d). Spot Gold declined 0.6% to $1,892 (down 0.4%). Silver slipped 0.5% to $27.7933 (up 5.3%). WTI crude surged $3.30 to $69.62 (up 44%). Gasoline rose 3.3% (up 57%), and Natural Gas jumped 3.7% (up 22%). Copper fell 3.2% (up 29%). Wheat rallied 3.7% (up 7%). Corn surged 4.0% (up 41%). Bitcoin recovered $2,185, or 6.2%, this week to $37,170 (up 28%).

Coronavirus Watch:

June 3 – NBC (Sara G. Miller and Akshay Syal, MD): “Confirmed coronavirus cases in the United States have fallen to levels not seen since March 2020, according to an NBC News analysis — and experts say they expect case counts to stay low through the summer… On Wednesday, the seven-day average was 16,860, the lowest since March 29, 2020.”

Market Mania Watch:

June 2 – Bloomberg (Katherine Greifeld and Vildana Hajric): “Retail traders are storming back into the options market as meme stocks soar. Trades involving 10 contracts or fewer are rising as a percentage of overall equity-call volume, according to the Options Clearing Corp. Such small lots suggest that individual traders are behind the buying, according to Susquehanna International Group… Such a feedback loop may already be at work in AMC Entertainment Holdings Inc., which has soared more than 2,000% this year. A record 2.4 million calls were purchased on Friday, beating the previous day’s all-time high.”

Market Instability Watch:

May 29 – Financial Times (Michael Mackenzie): “Calm has descended across one of the most influential markets for all investors: government bonds. Investors fearing a rolling interest rate shock unfolding in 2021 with the potential for puncturing high-flying equities, housing and highly indebted economies have been breathing easier of late. Courtesy of central banks’ sustained presence in bond markets, this year’s rise in market borrowing costs has not triggered a bigger shock at least for now… The present tone of relief in bond land has not been ruffled by the evidence of hotter inflation readings, or hints from central bank officials that they are looking at a ‘taper’ or a reduction in their brimming punch bowl of monetary liquidity. The US central bank is still purchasing $120bn of Treasury and mortgage debt each month and its balance sheet has doubled in size to $8tn from the start of 2020.”

June 2 – Financial Times (Colby Smith and Joe Rennison): “A sector of the US finance industry that looks after $4tn of savings for individuals and businesses has come under severe strain as US markets flirt with negative interest rates. Money market funds investing in short-term government debt have taken in hundreds of billions of dollars of new money from savers in recent months. But there is stiff competition to tap a dwindling supply of low-risk assets that generate positive returns. The result has been a squeeze that has driven the yields on some debt below zero, rendering swaths of the industry unprofitable and setting up a challenge for the Federal Reserve, which analysts say may have to weigh in to keep US interest rates positive.”

June 1 – Financial Times (Joshua Franklin and James Fontanella-Khan): “The fees US banks earn from special purpose acquisition companies have plunged in the past two months, disrupting what had been a main profit generator on Wall Street. Investment banks made a little over $430m from initial public offerings of Spacs and mergers between Spacs and private companies in April and May… That accounted for 4.5% of overall investment banking fees for the period. By comparison, in January and February, Spacs accounted for 22.5% of revenues and brought banks almost $3bn in fees…”

Inflation Watch:

June 2 – Reuters (Howard Schneider, Ann Saphir): “The U.S. economic recovery accelerated in recent weeks even as a long list of supply chain troubles, hiring difficulties, and rising prices cascaded through the country, Federal Reserve officials said in their latest review of economic conditions… Homebuilders could not keep up with demand, manufacturers faced delivery delays of the material needed to finish goods, and ‘it remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople.’ Prices were rising, and for now were likely to continue to do so, the Fed reported. ‘Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months,’ the Fed said.”

June 1 – Yahoo Finance (Brian Sozzi): “Retail giant Costco may be offering the clearest signs yet that the current inflationary spike the U.S. is experiencing as the economy emerges from the grips of the pandemic will be anything but transitory as countless Federal Reserve members continue to trumpet. ‘Chips shortages are impacting many items from an inflation standpoint, some items more than others. And with regard to containers and shipping, transportation costs have increased as well. This will continue — the feeling is that this will continue for the most part of this calendar year,’ warned Costco CFO Richard Galanti… ‘We’ve had a lot of questions about inflation over the past few months. There have been and are a variety of inflationary pressures that we and others are seeing. Inflationary factors abound. These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays, increased demand in various product categories, various shortages of everything from chips to oils and chemical supplies by facilities hit by the Gulf freeze and storms and, in some cases, higher commodity prices.’”

June 1 – Washington Post (Abha Bhattarai): “Consumers are paying more for a growing range of household staples in ways that don’t show up on receipts – thinner rolls, lighter bags, smaller cans – as companies look to offset rising labor and materials costs without scaring off customers. It’s a form of retail camouflage known as ‘shrinkflation,’ and economists and consumer advocates who track packaging expect it to become more pronounced as inflation ratchets up, taking hold of such everyday items such as paper towels, potato chips and diapers. ‘Consumers check the price every time they buy, but they don’t check the net weight,’ said Edgar Dworsky, a consumer advocate and former assistant attorney general in Massachusetts, who has been tracking product sizes for more than 30 years. ‘When the price of raw materials, like coffee beans or paper pulp goes up, manufacturers are faced with a choice: Do we raise the price knowing consumers will see it and grumble about it? Or do we give them a little bit less and accomplish the same thing? Often it’s easier to do the latter.’”

June 2 – Wall Street Journal (Gwynn Guilford and Sarah Chaney Cambon): “The U.S. economic recovery is unlike any in recent history, powered by consumers with trillions in extra savings, businesses eager to hire and enormous policy support. Businesses and workers are poised to emerge from the downturn with far less permanent damage than occurred after recent recessions, particularly the 2007-09 downturn. New businesses are popping up at the fastest pace on record. The rate at which workers quit their jobs—a proxy for confidence in the labor market—matches the highest going back at least to 2000. American household debt-service burdens… are near their lowest levels since 1980… The Dow Jones Industrial Average is up nearly 18% from its pre-pandemic peak in February 2020. Home prices nationwide are nearly 14% higher since that time. The speed of the rebound is also triggering turmoil. The shortages of goods, raw materials and labor that typically emerge toward the end of an expansion are cropping up much sooner.”

June 2 – Wall Street Journal (Adrienne Gaffney): “The pandemic flight patterns that saw an influx of newcomers to cities like Tampa, Fla., Austin and Detroit has transformed the rental market. Low supply… have led to a rental boom that parallels that of the sales market… In Reno, one of the fastest-growing markets, Rosi Booker of Sierra Sotheby’s International Realty has seen monthly rent prices skyrocket. ‘Where we’re seeing the demand going up is people waiting for a new home to be built, or who have not been able to find a house because everything’s going for so much over asking and you need so much cash to put down. So people are trying to get into rentals while they find a place to be able to buy.’ She says that a 1,500-square-foot house that might have rented for $1,800 six months ago would now be priced around $2,500.”

June 2 – Wall Street Journal (Paul Hannon): “Consumer prices across the rich world rose at the fastest pace in more than 12 years during April, as central bankers try to figure out whether shortages that have emerged as the global economy reopens will prove transitory or have long-lasting consequences. The Organization for Economic Cooperation and Development… said consumer prices in its 36 members, which are mostly rich countries, were 3.3% higher than in April 2020. That was the largest increase since October 2008. Across the Group of 20 leading economies… the annual rate of inflation rose to 3.8% from 3.1% in March, reaching its highest level in over a year.”

June 3 – Financial Times (Emiko Terazono and Judith Evans): “Global food prices have surged by the biggest margin in a decade, as one closely watched index jumped 40% in May, heightening fears that the inflation initially stoked by pandemic disruption was accelerating. The year-on-year rise in the UN Food and Agriculture Organization’s monthly index was the largest jump since 2011… The higher inflation will hit poorer countries reliant on imports for staple goods. For richer countries, the cost of raw ingredients accounts for only part of the overall price paid for products at supermarkets and restaurants. However, the rise in raw material prices has been so steep that big companies such as Nestlé and Coca-Cola have said they would pass on any increases.”

June 1 – Bloomberg (Vince Golle): “The supply crunch is tightening its grip on U.S. producers. The average delivery time for materials — from foam to steel to semiconductors — increased in May to 85 days, according to the Institute for Supply Management’s latest manufacturing report… The data also show numerous industries acknowledged difficulty finding skilled workers, another disruption for factories that are otherwise benefiting from stronger economic growth.”

June 3 – Financial Times (James Politi and Colby Smith): “Last month it took Carey Cherner, a 36-year-old used car dealer in Kensington, Maryland, less than 12 hours to sell a 2001 Ford F-150 pick-up truck with 184,000 miles on the clock. It went for $7,500 — 50% higher than usual. Cherner’s experience was not a one-off in the US used car market, where prices are rising rapidly. The industry is at the heart of the country’s growing inflationary pressures — and has therefore become a subject of great interest to policymakers in Washington. ‘There’s more people buying cars than there are cars in the market, which makes it go kind of crazy,’ Cherner said.”

Biden Administration Watch:

June 4 – Reuters (Trevor Hunnicutt): “President Joe Biden and Republicans entered the weekend sharply at odds over how to craft an infrastructure deal that could satisfy their camps, imperiling the odds of a bipartisan deal. Democrat Biden shot down a new proposal from the main Republican negotiator on infrastructure, Senator Shelley Moore Capito, that increased spending by about $50 billion over their last offer, the White House said. Biden rejected the offer, saying it ‘did not meet his objectives to grow the economy, tackle the climate crisis, and create new jobs.’”

June 3 – Reuters (David Shepardson and Jarrett Renshaw): “U.S. President Joe Biden offered to scrap his proposed corporate tax hike during negotiations with Republicans, two sources familiar with the matter said…, in what would be a major concession by the Democratic president as he works to hammer out an infrastructure deal. Biden offered to drop plans to raise corporate tax rates as high as 28% and instead set a minimum 15% tax rate aimed at ensuring all companies pay taxes, sources said. In return, Republicans would have to agree to at least $1 trillion in new infrastructure spending… And Biden has not given up on seeking as much as $1.7 trillion.”

May 30 – Reuters (Richard Cowan): “Negotiations with U.S. President Joe Biden over a potentially massive infrastructure investment package are inching forward even though disagreements remain over the size and scope of such legislation, Republican Senator Shelley Moore Capito said… ‘I think we can get to real compromise, absolutely, because we’re both still in the game,’ Capito said… Capito leads a group of six Senate Republicans who have been in regular contact with Biden and White House aides over a bill the administration wants to move through Congress promptly. The Republican senators have proposed $928 billion to improve roads, bridges and other traditional infrastructure projects.”

June 2 – New York Times (Alan Rappeport and Liz Alderman): “Treasury Secretary Janet L. Yellen will try to secure international support this week for a broad agreement that aims to put an end to global tax havens when she makes her first trip as President Biden’s top economic diplomat to the Group of 7 finance ministers summit in Britain. Such a pact has been elusive for years, as countries like Ireland sought to keep taxes as low as possible in order to attract global investment. But the Biden administration has made securing a global minimum tax a priority as it looks to raise corporate taxes domestically to help pay for a sweeping expansion of the nation’s infrastructure. Getting other governments to agree to a global minimum tax is critical to Mr. Biden’s goal of raising the corporate tax rate in the United States to 28% from 21%.”

May 30 – Wall Street Journal (Yuka Hayashi and Josh Zumbrun): “Economists and policy makers are debating whether stimulus spending and easy monetary policy are fueling inflation. Many businesses say there is another culprit that should share the blame: import tariffs. The Trump administration implemented tariffs on products including lumber, steel and semiconductors to shield American companies from a glut of cheap imported products from China and other countries. The tariffs have long been opposed by U.S. companies that import the goods and pay the levies. They are making a new push for the Biden administration to lift them, on grounds that tariffs contribute to rising prices and product shortages that are accompanying the post-pandemic recovery.”

Federal Reserve Watch:

June 2 – Yahoo Finance (Brian Cheung): “Some Federal Reserve officials are ready to start talking about pulling back the central bank’s aggressive policy support… Philadelphia Fed President Patrick Harker said ‘it may be time to at least think about thinking about tapering’ the Fed’s asset purchase program. Since the depths of the pandemic, the program has been snatching up about $120 billion in Treasury bonds and mortgage-backed securities each month. Dallas Fed President Robert Kaplan and Fed Governor Randal Quarles are among the other Fed officials that have similarly voiced their interest in taking the first step toward paring back its easy money policies. Those discussions would be taking place in the midst of what could be the fastest economic recovery on record, as the vaccine rollout revives the U.S. economy back to life.”

June 2 – Bloomberg (Brian Chappatta): “It’s not exactly tapering, but the Federal Reserve is starting the clock on withdrawing the emergency measures it used to support financial markets during the Covid-19 pandemic. The central bank said… it would start to gradually sell the $13.7 billion portfolio of U.S. corporate debt and exchange-traded funds it amassed through its Secondary Market Corporate Credit Facility, which was created during the worst of the pandemic-inspired market meltdown in March 2020. The facility marked an unprecedented intervention for the Fed because it effectively pledged to plow hundreds of billions of dollars into company debt if no one else would. That backstop… quickly restored investor confidence, led to a ferocious rally in practically every corner of the bond market and encouraged record-breaking amounts of debt sales…”

June 3 – Bloomberg (Matthew Boesler): “Now is not the time for the Federal Reserve to adjust its bond-buying program, though it makes sense for U.S. central bankers to be talking through options for the future, New York Fed President John Williams said. ‘The economy has improved, and I think it’s on a good trajectory, but to my mind, we’re still quite a ways off from reaching the ‘substantial further progress’ that we’re really looking for, in terms of adjustments to our purchases,’ Williams said…”

June 2 – Bloomberg (Matthew Boesler): “The Federal Reserve should begin discussing the time frame for paring back its bond-buying program, Philadelphia Fed President Patrick Harker said. ‘I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time,’ Harker said… ‘When that is, that is something we need to start discussing… ‘We have to be careful in removing accommodation so that we don’t create any kind of ‘taper tantrum,’’ Harker said… ‘And that’s why we need to communicate very early, very often what we’re going to do.’”

June 1 – Financial Times (James Politi): “A senior Federal Reserve official said the US labour market was tighter than it looks, which could accelerate the central bank’s timeframe for removing some monetary stimulus from the economy… James Bullard, president of the St Louis Fed, said that despite data showing non-farm payrolls still 8m jobs short of pre-pandemic levels, other indicators were far closer to normal, matching anecdotal evidence of worker shortages. ‘I’m evolving toward a judgment where labour markets should be interpreted as fairly tight, and you’re certainly seeing that in firms saying that they’re just gonna go ahead and raise wages for these types of workers. They’re going ahead and saying, ‘let’s pay some signing bonuses to get to get workers in the door’, you’re seeing some businesses actually just staying shuttered because they can’t find enough workers,’ Bullard said.”

June 1 – Bloomberg (Steve Matthews): “Randal Quarles left open the possibility that he might remain in his role as a Federal Reserve governor after his tenure as vice chair for supervision expires on Oct. 13 — a move that would reduce the openings for the Biden administration to fill. ‘My term as a governor of the Fed as you know extends until 2032,’ Quarles said… ‘There’s a tradition in our family but people serve out their full terms on the Federal Reserve board of governors even if they are no longer the chair or the vice chair still.’ Quarles is related by marriage to former Fed Chair Marriner Eccles, who resigned as chairman in 1948 and remained a Board member until 1951.”

U.S. Bubble Watch:

June 2 – Bloomberg (Steve Matthews and Payne Lubbers): “The pace of the U.S. recovery picked up somewhat in the past two months, sparking price pressures as businesses contended with worker scarcity and rising costs, the Federal Reserve said. ‘The national economy expanded at a moderate pace from early April to late May, a somewhat faster rate than the prior reporting period,’ the U.S. central bank said in its Beige Book survey… ‘Overall price pressures increased further since the last report. Selling prices increased moderately, while input costs rose more briskly.’”

June 3 – CNBC (Jeff Cox): “Private job growth for May accelerated at its fastest pace in nearly a year as companies hired 978,000 workers, according to… ADP. It was a big jump from April’s 654,000 and the largest gain since the 4.35 million added in June 2020 as the national economy came out of its Covid-19 lockdown. Economists… had been looking for 680,000 in May. The April total was revised sharply lower from the initially reported 742,000.”

June 3 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits dropped below 400,000 last week for the first time since the COVID-19 pandemic started more than a year ago, pointing to strengthening labor market conditions.”

June 2 – CNBC (Diana Olick): “High prices and low supply are finally taking some of the heat out of the housing market. Even with interest rates falling slightly, mortgage application volume fell 4% last week from the previous week, according to the Mortgage Bankers Association’s… index. It fell to the lowest level since February 2020… Applications for a mortgage to purchase a home fell 3% for the week and were 2% lower than a year ago. This is the second straight week that purchase demand was lower than a year earlier, even though mortgage rates are still lower.”

June 2 – Bloomberg (Prashant Gopal): “Luxury home sales in the U.S. are soaring faster than lower-cost segments as remote work, brimming stock portfolios and rising listings give wealthy buyers an edge. In the three months through April, purchases of high-end homes increased 26% from a year earlier, according to… Redfin. Sales of the most-affordable properties — in high demand by first-time buyers, downsizers and property investors alike — rose 18%. Mid-priced homes gained 15%.”

June 3 – Wall Street Journal (Kate Davidson): “With millions of Americans still out of work and job openings at a record high, policy makers are dealing with an unexpected problem: How to coax people back into the labor force. Congressional lawmakers from both parties are considering incentives such as providing federal funding to pay for hiring bonuses for workers and expanded tax credits for employers. A handful of states are moving to implement such programs on their own, without waiting for action from Washington.”

June 1 – Wall Street Journal (Ben Foldy and Austen Hufford): “Companies producing everything from steel to electric cars are planning and building new plants in Southwest states, far from historical hubs of American industry in the Midwest and Southeast. The lure is open land, local tax breaks and a growing supply of tech-savvy workers. The Southwest, comprising Arizona, New Mexico, Texas and Oklahoma, increased its manufacturing output more than any other region in the U.S. in the four years through 2020… Those states plus Nevada added more than 100,000 manufacturing jobs from January 2017 to January 2020, representing 30% of U.S. job growth in that sector…”

June 3 – Wall Street Journal (Theo Francis): “Palantir Technologies Inc. and DoorDash Inc. gave their longtime chief executives special stock awards worth hundreds of millions of dollars in 2020, two of the biggest compensation packages ever awarded to corporate leaders. Alexander Karp, the chief executive officer and a co-founder of Palantir, a data-analysis company that went public in September, received compensation valued at $1.1 billion last year, including $798 million in options and $296 million in restricted stock… Shortly before DoorDash went public in December, the meal-delivery company awarded co-founder and CEO Tony Xu restricted shares that were initially valued at more than $400 million…”

June 3 – Reuters (Jessica Dinapoli and Ross Kerber): “A new generation of executives at the world’s biggest asset managers is helping drive an uprising against Corporate America that environmental and social justice activists have long campaigned for. The big mutual fund firms, whose stock holdings amount to trillions of dollars, used to be loyal members of the corporate establishment. They cast their votes at shareholder meetings largely as instructed by the management of companies in their portfolios, on issues ranging from CEO pay to carbon emission reporting. They rarely discussed their decisions publicly. This year marks a sea change as top funds throw more of their weight behind investor challenges to companies on environmental, social and governance (ESG) issues and put companies on notice by often choosing to publicize how and why they voted…”

Fixed Income Watch:

June 1 – Financial Times (Joe Rennison): “The US junk bond market has begun wavering on rising inflation worries, raising the risk that the powerful rally since the depths of the pandemic in the debt issued by the riskiest corporate borrowers may be coming to an end. The high-yield bond market has been a shelter for investors seeking to avoid the volatility in stocks and government bonds this year… The additional yield above Treasuries investors can earn for holding junk bonds issued in the US market was essentially flat in May, marking only the second time in 14 months so-called spreads have not narrowed… The spread rose as high as of 3.42 percentage points earlier in May before easing to 3.29 points on Friday. It had been as low as 3.21 points in early April.”

China Watch:

June 2 – Yahoo Finance (Tian Chen and Sofia Horta e Costa): “As China’s central bank pulls back from direct intervention in its currency market, officials are reverting to old tools to manage the yuan. Authorities… said they granted an additional $10 billion for funds to invest in securities overseas, bumping the capital-outflow quota to a record $147 billion. On Monday, the People’s Bank of China said lenders will need to hold more foreign currencies in reserve, a move that will reduce the supply of the dollar onshore. Officials have pulled on multiple levers to influence the yuan since October… The PBOC is seeking to curb a yuan rally without derailing a plan to liberalize the currency and promote its global usage. The removal of the threat of intervention, however, can fuel one-way bets.”

June 2 – Bloomberg: “A selloff in China Huarong Asset Management Co.’s bonds is once again broadening to the nation’s other major bad-debt managers, raising the stakes for Beijing as it weighs an industry overhaul. Dollar notes issued by China Cinda Asset Management Co., China Orient Asset Management Co. and Great Wall Asset Management Co. are falling at the fastest pace since a knee-jerk tumble in April after Huarong shocked investors by failing to publish annual results. The three Huarong peers have combined liabilities of 2.9 trillion yuan ($454bn), including $28 billion of outstanding dollar bonds… Contagion risks are rising as investors look for more clarity on the fate of an industry that has effectively been shut out of the dollar bond market since fears of a Huarong default began swirling two months ago. China’s finance ministry is considering transferring its controlling stakes in the bad-debt managers to a new holding company…, raising questions over whether the government is preparing a broad shake-up.”

June 1 – Bloomberg: “China’s finance ministry is considering a proposal to transfer its shares in China Huarong Asset Management Co. and three other bad-debt managers to a new holding company modeled after the one that owns the government’s stakes in state-run banks, according to a person familiar… Policy makers are re-examining the proposal, which was first tabled three years ago, as part of discussions on how to deal with the financial risks posed by Huarong, said the person… Some officials view the creation of a holding company as a step toward separating the government’s roles as a regulator and shareholder, streamlining oversight and instilling a more professional management culture at Huarong and its peers, the person said.”

June 3 – Bloomberg: “Two of China’s largest bad-debt managers have told the banking regulator they’re concerned about losing access to the dollar bond market in the wake of turmoil at China Huarong Asset Management Co., according to people familiar… China Cinda Asset Management Co. and China Orient Asset Management Co. recently conveyed their concerns to the China Banking and Insurance Regulatory Commission, said the people…”

May 31 – Reuters: “China’s factory activity expanded at the fastest pace this year in May as domestic and export demand picked up, though sharp rises in raw material prices and strains in supply chains crimped some companies’ production, a business survey showed… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 52.0 last month, the highest level since December… New orders rose at the strongest pace so far this year and a gauge for export orders was the highest since November, but the output reading, while still solid, was slightly lower than the previous month.”

June 1 – Wall Street Journal (Stella Yifan Xie): “Buffeted by rising costs, some Chinese manufacturers are refusing to accept new orders or are even considering shutting down operations temporarily — moves that could put more strain on global supply chains and cause more inflation. Surging raw materials prices and a shortage of workers have pinched smaller Chinese manufacturers, including many that sell their products to the U.S. and other western markets. While many have passed their higher costs on to overseas buyers, the pain is so severe at some manufacturers that they are finding it hard to raise prices enough to make up the difference. Others don’t want to risk losing business to competitors. Many are now looking for other solutions to avoid losing money.”

May 30 – Bloomberg: “China’s factories, power plants and farms are fielding the worst effects of a surge in commodity costs that’s yet to hurt the wallets of the nation’s citizens. Electronic goods makers are balking at the volatility in raw materials prices and are cutting orders for rods and pipes, said Henan Qixing Copper Co. That’s a double blow for the supplier of metal parts, which is already dealing with soaring refined copper prices. ‘It’s a big test of the company’s capital,’ said Hai Jianxun, a sales executive at Qixing, a mid-sized copper fabricator in China’s industrial base. This situation ‘requires much more capital to keep the business running.’ China’s government has intensified its efforts to rein in commodity prices to help these industries weather what it hopes will be a transitory bout of inflation. Rhetorical intervention by top politicians, state planners and exchanges have had some success… But for many in the supply chain, the money woes are mounting up.”

June 2 – Financial Times (Primrose Riordan in Hong Kong and Christian Shepherd): “China’s runaway economic recovery has been so successful that it has caused power shortages across dozens of its manufacturing and industrial hubs in the south of the country. Factories across cities such as Guangzhou, Foshan and Dongguan, known for producing global consumer and high-tech products, have been ordered to use less power and even close for between one to three days a week to mitigate the shortfall.”

June 1 – Australian Financial Review (Sarah Turner): “China’s factories stayed in expansion mode in May but also experienced intensifying price pressures and supply chain disruptions, which are unlikely to please a Chinese government concerned about red hot commodity prices. The latest official purchasing managers manufacturing survey slipped to 51 points from 51.1 a month ago but held above the key 50 point level that separates expansion from contraction… That was followed yesterday by the Caixin China general manufacturing PMI, with a larger weighting to small companies and exporters, which climbed to 52 points, up from April’s 51.9.”

May 30 – Bloomberg: “Almost two dozen cities across China’s key industrial province of Guangdong are now rationing electricity to businesses as the global economic recovery and hot summer weather boost demand. Some 21 municipalities in the southern province that’s home to almost 130 million people are limiting power use, China Southern Power Grid Co. said… Electricity consumption in the grid operator’s five-province region is up 24% this year through May 29 from the same period in 2020 and surged to an all-time high on May 21.”

June 1 – Bloomberg: “Share of Chinese banks’ property loans in overall lending mix has fallen as of end-April as earlier property control policies took effect, Liu Zhongrui, an official with China Banking and Insurance Regulatory Commission, says…. The regulator is conducting on-site inspections in key cities to prevent operational loans from flowing into the property market.”

May 31 – Bloomberg: “China is beginning to curb issuance of securities backed by residential mortgages, expanding efforts to rein in runaway property prices and household debt, people familiar… said. The central bank has since April started controlling the size and pace of RMBS issuance by lenders… The People’s Bank of China is considering including such securities in its assessment of property-related loan exposure, they said. Slowing banks’ ability to issue loans to residential buyers is the latest in a series of measures to stem skyrocketing home prices. A drumbeat of statements designed to cool down price expectations have yet to deter home buyers, who are using real estate as a hedge against inflation.”

June 3 – Wall Street Journal (Theo Francis): “Yield-hungry investors are still snapping up Chinese property bonds, despite a recent string of defaults, tighter regulation and market unease about one of the country’s biggest developers. As of June 2, real-estate companies from China had sold $20.3 billion of dollar bonds this year, according to Refinitiv, a 16% increase over the same period last year. Heavy bond issuance from Chinese developers is ‘completely contrary’ to market expectations…, said Owen Gallimore, head of credit-trading strategy at ANZ… ‘When deals come, the investor demand is enormous,’ Mr. Gallimore said.”

Global Bubble Watch:

June 2 – Financial Times (Wolfgang Schäuble): “‘In the long run we are all dead,’ wrote John Maynard Keynes 98 years ago. He believed short-term economic intervention was necessary in times of crisis to stabilise the economy. New stimulus programmes, including the EU’s post-pandemic recovery fund, are in line with this tradition. I was in favour from the outset — to the surprise of some people. During my time as German finance minister, I had a reputation for frugality as a matter of principle. Yet then, as now, my goal was sustainability: borrowing in times of crisis to stabilise the economy makes sense, as long as the question of repayment is not forgotten. The need to pay back the debt later is often overlooked. Many governments focus on the ‘easy’ bit of Keynesianism — borrowing — and then postpone repayment of their debts. This leads to continually expanding sovereign debt. Sooner or later, inflation looms. Keynes saw this as a major threat, citing its potential for ‘overturning the existing basis of society’.”

June 2 – Bloomberg (Faris Mokhtar): “Housing prices worldwide are rising the most since before the global financial crisis, following a market frenzy seen in places from New Zealand to Canada to Singapore during the pandemic. Average prices jumped 7.3% in the 12 months to March, the fastest pace since the fourth quarter of 2006, Knight Frank’s Global House Price Index report showed… Turkey topped the list, registering 32% growth, followed by New Zealand at 22.1%. The U.S. took fifth spot at 13.2%, its steepest increase since December 2005. Massive fiscal and monetary stimulus to bolster economies during the health crisis has stoked a property boom worldwide. That’s also fueling concerns of bubbles…”

May 31 – Bloomberg (Nabila Ahmed): “Sydney house prices posted their largest quarterly gain in almost 33 years, as cashed-up buyers snapped up high-end properties amid low interest rates and a lack of supply. Nationwide, values rose faster in May than the previous month, posting a 2.2% rise, capping off the quarter with a 7% lift… Of 334 areas analyzed by the firm, 97% recorded a boost to housing values over the past three months… ‘Such a synchronized upswing is an absolute rarity across Australia’s diverse array of housing markets,’ Tim Lawless, research director at CoreLogic…”

May 28 – Financial Times (Thomas Hale, Harriet Agnew, Michael Mackenzie and Demetri Sevastopulo): “When the Biden administration announced a fresh investigation into the origins of the coronavirus outbreak in Wuhan…, the Chinese reaction was swift and furious. Zhao Lijian, foreign ministry spokesperson, accused the US of ‘political manipulation’ and of ‘stigmatising’ China… But just a day earlier, another announcement told a different story about the ties between the world’s two leading powers. Goldman Sachs, an emblem of the globally dominant American finance industry, unveiled a wealth partnership with the state-owned Industrial and Commercial Bank of China. The deal could allow the Wall Street firm to draw on the savings of hundreds of millions of the bank’s Chinese customers. In an era that is increasingly defined by geopolitical competition and a push towards economic ‘decoupling’, American finance has never been closer to Chinese wealth. Seduced by untapped savings and a growing asset management market, worth an estimated Rmb121.6tn ($18.9tn) last year, Wall Street’s most storied firms are embedding themselves more deeply than ever into the country.”

May 31 – Bloomberg (Sam Kim): “South Korea’s exports surged the most since 1988 in May as a reopening of overseas economies boosted demand for products manufactured by the Asian nation. Overseas shipments increased 45.6% from the pandemic-driven plunge a year earlier… Exports to China rose 22.7% while total semiconductor shipments increased 24.5%.”

Central Banker Watch:

June 2 – Financial Times (Chris Giles, James Politi, Martin Arnold and Robin Harding): “Once, central bankers knew what they needed to do to handle inflation. As they grapple with the economic consequences of the coronavirus pandemic, the consensus on how best to foster low and stable price growth has broken down. After years of setting interest rates on the basis of inflation forecasts and seeking to hit a target of about 2%, the leading monetary authorities around the world are pursuing different strategies. The OECD warned this week that ‘vigilance is needed’, but any attempt to raise interest rates should be ‘state-dependent and guided by sustained improvements in labour markets, signs of durable inflation pressures and changes in the fiscal policy stance’… The US Federal Reserve has shifted its stance to give more leeway to inflation and greater priority to employment, the European Central Bank is embroiled in a row over whether to be more tolerant of any inflation overshoot, and the Bank of Japan is vainly battling to revive consumers’ price growth expectations. The US shift in strategy has been the most radical; last year Fed chair Jay Powell announced a new monetary framework.”

May 28 – Bloomberg (Jill Ward): “The euro’s charge toward a three-year high is stumbling as the European Central Bank quashes expectations that it’s anywhere near paring back emergency stimulus. The ECB is increasingly expected by economists and investors to extend its elevated pace of emergency bond-buying at a June meeting, even as the continent’s vaccination program surges forward and the economy rebounds… Policy makers including Executive Board member Fabio Panetta have signaled a willingness to shrug off near-term inflationary spikes and keep policy loose for the time being.”

June 1 – Reuters: “Euro zone inflation surged past the European Central Bank’s elusive target in May, heightening a communications challenge for policymakers who will happily live with higher prices for now but may face a backlash from irate consumers. Inflation in the 19 countries sharing the euro accelerated to 2% in May from 1.6% in April… and above the ECB’s aim of ‘below but close to 2%’… ‘Everyone saw it coming, but still it is starting to make a lot of people sweat,’ ING economist Bert Colijn said. ‘Inflation is returning rapidly at the moment at a time when news about economies is increasingly upbeat and labour markets are profiting from the reopening.’”

Europe Watch:

June 1 – Reuters: “Euro zone manufacturing activity expanded at a record pace in May, according to a survey… which suggested growth would have been even faster without supply bottlenecks that have led to an unprecedented rise in input costs… IHS Markit’s final Manufacturing Purchasing Managers’ Index (PMI) rose to 63.1 in May from April’s 62.9… and the highest reading since the survey began in June 1997. An index measuring output… eased from April’s 63.2 to 62.2.”

June 1 – Bloomberg (Jana Randow): “Euro-area factories are struggling to keep up with the economic recovery as orders rise faster than production, setting the bloc up for a summer spike in inflation. Delivery delays for raw materials and components are constraining output growth, leaving companies unable to meet rising demand, according to a survey by IHS Markit. While purchasing activity rose at the fastest pace in nearly a quarter century of data, manufacturers also ran down inventories of finished goods to the sharpest degree recorded since November 2009. Factories lifted their prices by the most in more than 18 years of survey data as they took advantage of the tight market to pass on higher costs to customers.”

June 3 – Reuters (Jonathan Cable): “Euro zone business activity surged in May as the easing of some coronavirus related restrictions injected life into the bloc’s dominant services industry, a survey showed, echoing data on Tuesday which showed factories had their best month on record. An acceleration of vaccine programmes across the region and a fall in reported daily cases has allowed governments to remove some measures… That meant IHS Markit’s final composite Purchasing Managers’ Index (PMI)…, jumped to 57.1 last month from April’s 53.8, its highest level since February 2018.”

May 31 – Financial Times (Martin Arnold): “German inflation rose to 2.4% in May, its highest rate in more than two years, in a move likely to intensify debate about whether Europe’s ultra-loose monetary policy could cause the region’s largest economy to overheat. The federal statistical agency said… consumer prices had reached a level last seen in October 2018… Surging demand for travel after coronavirus lockdowns were lifted had pushed the price of package holidays up by about 7%, analysts at Commerzbank estimated, adding: ‘It is obvious that the demand for travel and other leisure activities is increasing significantly with the easing of the anti-corona measures, thus providing scope for price increases.’”

June 1 – Bloomberg (Paul Gordon and Alexander Weber): “Europeans are in for a costly summer that will test central bankers’ resolve on stimulus as the region’s delayed economic recovery unleashes surging demand. The question officials face from Frankfurt to Warsaw is whether accelerating inflation will last long enough to alter the longer-term expectations of companies and households. If it does, that could create a self-reinforcing cycle in which higher prices prompt bigger wage demands — despite elevated unemployment — that fuel yet more price increases… ‘All the cyclical and structural factors add up and point toward a trend reversal,’ said Gertrud Traud, chief economist at Helaba… ‘Once German inflation hits 3%, the labor unions will ask: ‘And what about the workers?’ The prospect of faster inflation was evident in a swathe of reports on Tuesday…”

EM Watch:

June 2 – Bloomberg (Onur Ant and Cagan Koc): “Turkish President Recep Tayyip Erdogan renewed calls for lower interest rates despite elevated inflation, sending the lira to a fresh low against the dollar and prompting the central bank governor to push back against expectations of an imminent move. With a vague reference to summer months as a target date for a reduction in borrowing costs, it was Erdogan’s latest intervention at the central bank, where he installed Governor Sahap Kavcioglu in March after firing the previous governor for tightening policy too much. ‘It’s an imperative that we lower interest rates. For that, we will reach July and August thereabouts so that rates can begin to fall,’ the Turkish leader said… The lira weakened around 3% early Wednesday…”

June 1 – Financial Times (Michael Stott): “Ravaged by one of the world’s worst coronavirus outbreaks, wracked by political turmoil, scarred by corruption scandals and blighted by worsening poverty, Peru will choose its fourth president in under a year on June 6. Described by many observers as a choice between the lesser of two evils, the second-round run-off election pits Pedro Castillo, a rural primary school teacher turned hard-left populist, against Keiko Fujimori, the widely disliked scion of an authoritarian president who ruled in the 1990s. Panic has seized the Peruvian elite at the prospect of a win by Castillo, whose political party Free Peru is led by a Marxist advocating widespread nationalisation, higher taxes, a new ‘people’s constitution’ and import substitution policies in the world’s number two copper producer.”

June 2 – Wall Street Journal (Greg Ip): “Latin America, which led developing nations in adopting a market-friendly model of economic development, may now be leading them away from it. On Sunday, voters in Peru could elect as president Pedro Castillo, leader of a Marxist party that seeks to nationalize foreign-owned mines, invokes Lenin and Fidel Castro, and questions democratic institutions such as a free press. On the same day, Mexicans will decide how much control over Congress to give their leftist president, Andrés Manuel López Obrador. Since taking office in 2018, he has expanded state control of oil, gas and electricity while undercutting the independence of the judiciary. And just weeks ago, Chileans elected a far-left slate of delegates to rewrite their constitution. A leftist already governs Argentina and polls suggest one could win Brazil’s presidential election next year.”

Leveraged Speculation Watch:

June 2 – CNBC (Jeff Cox): “The pandemic era has been great for hedge funds, which have seen their assets boom to a record amid high hopes for the economy and huge government spending. Total assets for the industry swelled to $4.07 trillion as of the end of March, according to… BarclayHedge. Assets under management first topped the $4 trillion mark in February. That growth has come thanks both to solid performance and heightened interest from investors who continue to plow cash into the space. Over the past 12 months, hedge funds have made more than half a trillion dollars – $552.1 billion – in trading profits alone. In that time, assets under management have swelled more than 42%.”

June 2 – Bloomberg (Lu Wang and Melissa Karsh): “Facing another push from day traders targeting the most-shorted stocks such as AMC Entertainment Holdings Inc., hedge funds aren’t backing down this time. Professional speculators, who were forced to retreat in late January amid a similar assault, are instead boosting their bearish wagers. Their short positions against single shares climbed for a ninth straight week, reaching an almost one-year high relative to the overall equity holdings, according to prime-broker data compiled by Goldman Sachs…”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 4 – CNBC (Tucker Higgins): “A top Justice Department official warned Friday that U.S. business leaders need to do more to prepare for an onslaught of ransomware attacks being carried out by overseas states and criminal groups. ‘The message needs to be to the viewers here, to the CEOs around the country, that you’ve got to be on notice of the exponential increase of these attacks,’ Lisa Monaco, deputy attorney general, told CNBC’s Eamon Javers

June 1 – Bloomberg (Mike Dorning, Fabiana Batista and Michael Hirtzer): “JBS SA, the largest meat producer globally, has made ‘significant progress’ to resolve the cyberattack that impacted its global operations and will have the ‘vast majority’ of its plants operational on Wednesday. ‘Our systems are coming back online and we are not sparing any resources to fight this threat’” JBS USA Chief Executive Officer Andre Nogueira said… The cyberattack forced the shutdown of all of JBS’s U.S. beef plants — facilities that account for almost a quarter of American supplies…”

June 1 – Reuters (Christopher Walljasper): “Joe Del Bosque is leaving a third of his 2,000-acre farm near Firebaugh, California, unseeded this year due to extreme drought. Yet, he hopes to access enough water to produce a marketable melon crop. Farmers across California say they expect to receive little water from state and federal agencies that regulate the state’s reservoirs and canals, leading many to leave fields barren, plant more drought-tolerant crops or seek new income sources all-together. ‘We’re taking a big risk in planting crops and hoping the water gets here in time,’ said Del Bosque… The last major drought from 2012 to 2017 reduced irrigation supplies to farmers, forced strict household conservation measures and stoked deadly wildfires… Nearly 40% of California’s 24.6 million acres of farmland are irrigated, with crops like almonds and grapes in some regions needing more water to thrive.”

June 3 – Associated Press (Adam Beam): “Each year Lake Oroville helps water a quarter of the nation’s crops, sustain endangered salmon beneath its massive earthen dam and anchor the tourism economy of a Northern California county that must rebuild seemingly every year after unrelenting wildfires. But now the mighty lake — a linchpin in a system of aqueducts and reservoirs in the arid U.S. West that makes California possible — is shrinking with surprising speed amid a severe drought, with state officials predicting it will reach a record low later this summer. While droughts are common in California, this year’s is much hotter and drier than others, evaporating water more quickly… The state’s more than 1,500 reservoirs are 50% lower than they should be this time of year…”

May 29 – Bloomberg (Mark Chediak and Josh Saul): “After months of debate, Texas lawmakers are poised to pass a series of measures in response to February’s deadly blackouts. Yet those bills, critics say, do little to fix the fundamental issues that made the state’s power grid so vulnerable. While the pending legislation will take steps including forcing electric plants and some pipelines to prepare better for the cold, the bills will do nothing to guarantee the state has enough generating capacity on hand at all times. Nor would they force Texas’s grid to connect to neighboring states so they could provide backup. The result is that Texas will continue to have the most isolated and least regulated power grid in the U.S…”

Geopolitical Watch:

June 2 – Bloomberg: “Of all the issues that have roiled ties between China and the West since the pandemic emerged, none has been more sensitive in Beijing than questions about the origin of Covid-19. China last year responded to U.S. ally Australia’s initial push for an independent probe into where the virus came from with tariffs on exports of its barley and wine. Since then Beijing has repeatedly blasted calls for more transparency as politically motivated, and sought to deflect suggestions it came from a laboratory in Wuhan with alternative origin theories ranging from transmission via frozen-food imports to a release from U.S. bio-facilities. That made U.S. President Joe Biden’s revival of the lab theory last week — by giving intelligence agencies 90 days to get closer to a definitive conclusion on the origin of the coronavirus — all the more meaningful.”

May 31 – Financial Times (Gideon Rachman): “The slump in relations between China and Australia sounds like a small detail in the great picture of world affairs. But this is a corner of the canvas that merits close attention. It provided an early indication of China’s extreme sensitivity to international calls for an inquiry into the origins of Covid-19. The deterioration in the relationship between Beijing and Canberra has been startling. Back in 2014, President Xi Jinping gave a speech to the Australian parliament hailing a new trade deal and the ‘vast ocean of good will between Australia and China’. But over the past year, China has imposed tariffs and other measures on Australian wine, food and coal, and Chinese officials have accused the country of racism and war crimes. The origins of the dispute may be just as significant as the way it unfolded. Late last year, Chinese diplomats released a dossier listing 14 grievances against Australia. The gripes included blocking foreign investment deals and funding ‘anti-China’ research. But one particular grievance stood out. Looking at the chronology of the dispute, it is apparent that the moment China truly escalated matters was when Canberra demanded an independent inquiry into the origins of Covid-19.”

June 1 – Bloomberg (Arsalan Shahla and Golnar Motevalli): “World powers and Iran are unlikely to reach a final agreement in the current round of talks to revive their 2015 nuclear deal, Iranian officials said, cooling speculation that U.S. sanctions on Tehran’s key oil exports might soon be lifted. Diplomats had hoped to fully restore the landmark deal before Iran’s June 18 presidential elections, after which the presidency of Hassan Rouhani will wind down. He’s widely expected to be succeeded by a hardliner who will be more hostile to the U.S. and the nuclear deal.”

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